Wednesday, 6 February 2013

Fundamental vs Cap-Weight Portfolio: Still Very Close after 2 and a Half Years

Early in 2010 I became convinced that indices based on fundamental accounting numbers made more sense as an ETF investment strategy than the traditional indices based on market capitalization. The research seemed convincing but would real world investing see the same results I asked myself. To try answering the question, in June 2010 I created two parallel portfolios with the same initial pretend capital of $100,000 and the same asset class breakdown to pit ETFs based on each type of index in a head to head battle.

Past updates on the contest:
  • June 2010 - initial post with all the portfolio rules
  • August 2011 - Cap-weight portfolio ahead by 0.4%; both portfolios up about 10%
  • March 2012 - Cap-weight portfolio ahead by 0.07%; both are up 16% in total
Today (see bottom of this blog page for the Google spreadsheet with details of the current portfolio):
  • Cap-weight still ahead in total by a slight 0.5% 
  • Both have gained over 22% since inception
  • Every asset class / ETF holding has made gains
  • Asset class gains are unequal as expected but none has yet gone beyond the automatic rebalancing rule of a quarter deviation over/under its initial share (e.g. a 5% holding going above 6.25% or below 3.75% of the total portfolio)
  • In some classes the cap-weight ETF is ahead, while in others it is the fundamental index ETF
Recent Substitution trades
Bottom line
  • The jury is still out with such a tiny total cumulative difference, though I am a bit surprised the fundamental side isn't pulling ahead. 
  • Having a portfolio with a mix of asset classes really works well - note how the total portfolio is up 22+%. By comparison, the TSX Composite Capped index is up almost the same at 21%, almost the same but the ride has been a lot smoother with both our portfolios

1 comment:


A very interesting post on fundamental vs cap- weight portfolio.

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